Tuesday, May 02, 2006

Rich man, poor man

Over the past generation, much mainstream economic thought has assumed that what is good for rich people is good for America. Naturally, this view has tended to transform university economics departments and business schools into cheerleaders for the Republican Party.

Ask professor Pangloss of the University of Chicago what we ought to do about capital gains or the inheritance tax or unions, and he will dazzle you with equations supposedly demonstrating that the political outcomes sought by the wealthiest Americans are also best for society as a whole.

That, at any rate, is the current economic orthodoxy. How well does it reflect reality?

Nearly 50 years ago, the economist John Kenneth Galbraith published The Affluent Society, in which he predicted that an increasingly wealthy America was in danger of producing "private wealth and public squalor." A few years later, Galbraith advised Presidents Kennedy and Johnson as they extended the post-New Deal state in ways that lessened the hardships of poverty for millions of Americans.

The America Galbraith lived to see - he died last week at the age of 97 - became an immensely rich nation. In real terms, the gross domestic product is now five times larger than when The Affluent Society appeared, which means that, when one accounts for population growth, the average American is nearly three times wealthier.

But "average" is a tricky concept; it's been noted that if you have one foot in a bucket of ice and another in a bonfire, a statistician will tell you that, on average, the temperature is fine. Over the past quarter-century, political power has shifted from Democrats to Republicans, with striking results for the average distribution of wealth.

Since the election of Ronald Reagan the wealth of the nation has more than doubled. Per capita, Americans are now 70 percent richer than they were in 1979. Where have these several trillion dollars of new affluence gone?

For poor people, the answer is clear: Essentially none of this wealth has come their way. Adjusted for inflation, the tenth percentile of after-tax family income is almost exactly the same today as it was in 1979 - about $13,500 (note this means that 30 million Americans live on even less). For the middle class, the situation is only slightly different. In 1979, the average middle-class family had an after-tax income of $38,000; today that figure is about $43,700, meaning that over the past quarter-century the average American family has seen its income rise by about $200 per year.

For our wealthiest citizens, by contrast, 25 years of Republican rule have made these very much the best of times. During this period, the average after-tax income of the top 1 percent of Americans has risen an astonishing 111.3 percent, from $298,900 to$631,700 per year (again, all these figures are adjusted for inflation). Inother words, in absolute terms the poor are just as poor as they were a generation ago, while a middle-class family's annual share of the last quarter-century's worth of economic growth allows it to buy one extra tank of gas every three months.

Meanwhile, in relative terms, both groups are far poorer: indeed, compared to the rich, most Americans are now only half as well-off as they were during the Carter presidency.

Like his intellectual mentor Thorstein Veblen, Galbraith understood that, for all its pretensions to being a science, economics has much more in common with sociology. And, like Veblen, he recognized that economists who fail to appreciate this point areparticularly prone to confuse ideological commitment for scientific truth.

That so many of his academic colleagues ended up arguing that the increasingly vast gulf between America's rich and everyone else is actually a desirable state of affairs, did not, I suspect, surprise him.